CPF How to make your CPF savings work harder

How to make your CPF savings work harder   

https://www.straitstimes.com/business/invest/how-to-make-your-cpf-savings-work-harder

2023-02-19

If you want to earn more interest from cash in the Ordinary Account (OA) of your Central Provident Fund (CPF), you do not have to hope for the official rate to go up – just head to the nearest OCBC Bank branch.

It is the only lender here that offers a special deal for people who want to open fixed deposit accounts with money in their OA. Its fixed deposit rate is higher than the 2.5 per cent the OA pays: OCBC offers 3.4 per cent for a full-year placement and 3.88 for eight months. The minimum CPF amount required is $20,000.

The OCBC rate means you will get $180 more for a full-year placement of $20,000, or $184 more for eight months.

Of course, the actual “profit” will be slightly less as you will have to factor in interest that is lost when you take out the money as well as effective dates of placement when funds are moved between your CPF and bank accounts.

So, opening such accounts will make sense only if you have a sizeable amount of money in your OA. For every $100,000 that you place in the OCBC fixed deposits, you will get $3,400, or $900 more than the OA’s 2.5 per cent interest for the same amount, for the one-year placement, and about $2,587, or $920 more, for the eight-month one.

Some CPF members recently expressed hope that the Government would announce an increase in the OA interest rate in this week’s Budget, but this did not happen.

This is because the formula for deriving the OA rate is based on the sum of 80 per cent of the average one-year fixed deposit rate of local banks and 20 per cent of the average of their savings rate. This figure is calculated for the preceding three months, and the three-month average is then used to determine the OA rate for the quarter.

But both the fixed deposit and savings rates used in the OA computation are the low board rates. Hence, the result is still lower than the legislated minimum interest of 2.5 per cent per annum.

Many more CPF members will benefit if the OA rate stays at 2.5 per cent as they are still paying off Housing Board mortgages, which are pegged at 2.6 per cent, or 0.1 percentage point higher than OA. This is the lowest fixed mortgage rate in town, so any increase will mean HDB flat owners will have to pay more for their loans every month.

Moreover, those with spare cash in their OA are not without choice – they can open the CPF fixed deposit accounts without any real risk of losing their money.

Here are three things to consider when trying to make your CPF money work harder.

Pay off home loan first

You should not head to the bank to open more fixed deposits if you still have not paid off your home loan. It makes no sense to earn such interest when you are paying off home loans that are more expensive.

Unless the excess cash is your emergency fund, you are probably better off using the money to make lump-sum payments on your loan. Similarly, don’t be in a hurry to put your OA money in fixed deposits if you need to use it to pay off your housing loan.

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Don’t forget Special Account

Those who bemoan the OA’s lower interest rate must not forget that they have been enjoying the Special Account (SA) interest of 4 per cent for many years.

If you are under 55 and your SA is below the full retirement sum of $198,800, you can still top up the account to this limit and enjoy the 4 per cent interest. Indeed, the SA is better than fixed deposits because you do not need to renew any tenure and the interest gets rolled over to earn more money.

Another benefit is that topping up the SA with cash allows you to enjoy tax relief of up to $8,000 annually. So you pay less tax and earn higher interest if you see the SA as your personal “fixed deposit”.

Use CPF for lifelong income

Most overseas experts actually advise retirees in their countries to consider annuities, which generate fixed income for old age. But such products are not cheap and their payments can be affected by market conditions.

Here, people can join CPF Life, the national annuity that supports all retirees with stable and lifelong incomes that are even guaranteed by the Government. Rules are reviewed regularly to help CPF members because the ultimate aim is to ensure everyone can take part in CPF Life and receive more money in their old age.

So don’t just think about earning more interest in your OA. Think also about how to join CPF Life at its highest tier, so you can profit more for the rest of your life.

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